With the Ukraine crisis on, does it look likely that the Fed my choose to put off rate hikes for now?

That is a distinct possibility although the US is not even acknowledging that at this point of time. As the crisis in Ukraine deepened and crude crossed $100/bbl, senior Fed officials were apparently working furiously on their calculators. The billion dollar question is how this scenario will impact the US economy, global demand and whether rate hikes would hurt. For now the room is divided but the Fed will have to bell the cat sooner rather than later.

Here is why there are expectations of slower rise in rates. Oil and commodity price shocks are normally a setback to global growth engine and consumer confidence. Another perspective is that March rate hike may still happen, but the Fed may tread more cautiously after that and prefer to gauge the impact of its decisions. For instance, the March rate hike may be 25 bps rather than 50 bps and there may be 5 hikes instead of 7 hikes in 2022.

It is not just the analysts, but even FOMC members, who are insiders privy to the operations of the Fed, admit that the unfolding situation in Ukraine could hit economic outlook in the US and high oil prices could lead to inflation and low demand in most countries. With all the flux in global markets and the risk of divergence, the Fed may even choose to wait out March and explore a rate hike in the next meeting of the US Federal Reserve.

For example, in a worst case scenario, if crude crosses $110/bbl equations could change drastically. On Thursday, the oil price had spiked to $105 but settled the week below the $100 mark. But oil analysts do not rule out $125/bbl on oil and even $150 by end of 2022. That is forcing the Fed to rethink if aggressive series of rate hikes would be feasible in 2022. Even the CME Fedwatch probability of 50 bps rate hikes in March fell from 33% to 10%.

The new risk highlighted in Fed internal discussions is the stagflation risk in the US, which represents a period of high inflation and weak growth. That is something the US does not want. That is what happened during the 1970s oil crisis and the pain was long and hard. The US obviously does not want a repeat of that. A likely shift for now could be 25 bps in March instead of 50 bps. Future rate hikes would be contingent on war impact.